The Downfall of the Bayesian: An Expensive Disaster for the Insurance Industry

The loss of the superyacht Bayesian, which sank this month and claimed the lives of technology entrepreneur Mike Lynch and six others, could cost the insurance industry at least $150 million, according to initial estimates by experts. The 184-foot yacht, flagged under Britain and estimated by experts to be worth about $40 million, capsized and sank within minutes on August 19 after being struck by an early morning storm off the northern coast of Sicily. Prosecutors in the town of Termini Imerese, near Palermo, are investigating the captain and two other crew members. An investigation implies no guilt and does not necessarily mean formal charges will follow. The inquiries include offenses such as manslaughter and shipwreck, and according to the prosecutors, will require time and the recovery of the wreck. The captain, James Cutfield, left Palermo on Thursday by private plane, as a source close to the investigation told Reuters. Cutfield's destination was unclear. Cutfield, a native of New Zealand, and his wife reside in Palma, the capital of the Spanish island of Mallorca. The hull of the superyacht was insured against physical damage by yacht insurer OMAC and a consortium of insurers, including Travelers Companies, Navium Marine, and Convex, Reuters reported last week. The Protection & Indemnity (P&I) insurance, which typically covers third-party liability claims such as environmental damage, injuries, and fatalities, was provided by British Marine. The hull was likely insured for about $40 million, while the P&I coverage was higher, said insurance experts. "To our knowledge, the value of the boat was between $40 and $50 million, so the extent of the hull and machinery insurance was probably of that magnitude," said Marcos Alvarez, Managing Director of global financial institutions ratings at Morningstar DBRS. The P&I policy would likely be "multiples" of the hull value, amounting to $200-300 million, Alvarez added, noting that it would also cover liability payments even if the captain or crew were found negligent. Oscar Seikaly, CEO of broker NSI Insurance Group, which offers yacht insurance, estimated the hull value at $40-70 million, but said the P&I coverage might not exceed $100 million. The P&I insurance would also cover the salvage of the Bayesian, said Francesco Dubbioso, country head for Italy at insurer Alta Signa Europe, who estimated the value of the superyacht at $30-40 million. Reuters was the first to report on the potential insurance costs. Neither OMAC, Travelers, nor Navium Marine responded immediately to Reuters' requests for comment. Convex declined to comment. The fate of the Bayesian, which has baffled experts who said the boat was built to withstand a severe storm, adds to the recent difficulties faced by yacht insurers, who have suffered a series of hurricane losses in recent years. Premium rates have quadrupled or quintupled in parts of the U.S. and the Caribbean in recent years, and yacht insurers have reduced the scope of their coverage due to the risks, Seikaly said. As a result, insurers have increased their rates and reassessed their policies and risk appetites, industry experts noted. In addition to hurricanes, insured losses mainly stem from severe storms, floods, and other weather events in North America, the Caribbean, and Europe, according to a report by broker Marsh. Seikaly said four clients were ready to buy boats last week but changed their minds due to the high insurance costs. Climate change is also likely to exacerbate the concerns of yacht insurers, Seikaly said, as it leads to unexpected events. “Who would have thought that a storm in the Mediterranean in August would sink a ship?”